Nondeductible IRA

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Nondeductible IRA

Postby doglover » Sun Mar 24, 2013 9:21 am

I have a profit sharing/401k plan fully funded every year with approx 900k. I also have a traditional IRA with approx 60k which has a basis of approx 30k from the past few years of nondeductible contributions.

Is it worth it to continue with these nondeductible contributions each year?

I am 52 y o.
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Re: Nondeductible IRA

Postby Default User BR » Sun Mar 24, 2013 1:35 pm

I am assuming that you make too much to contribute to a Roth IRA.

You should investigate whether your 401(k) will accept rollovers from IRAs, and under what restrictions. If possible, then you would roll over the taxable portion into the plan, then convert the remainder to Roth. From that point on, make non-deductible contributions and convert to Roth (so-called "backdoor Roth").


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Re: Nondeductible IRA

Postby retiredjg » Sun Mar 24, 2013 2:08 pm

doglover, the answer must be considered in light of your total portfolio. Since your taxable account is near $2 million, that might affect the answer to your question.

Here are your choices:

    1) Put the money into IRA, contributions are non-deductible . You pay tax now on the contributions, but the tax on the earnings is deferred until withdrawal. If later in life, you are in a lower tax bracket, you could convert this money to Roth IRA at a lower rate.

    2) Put the money into taxable. You pay tax now on the contributions. The tax on the earnings depends on what you invest in. Dividends from bonds would be taxable at your ordinary rate each year. Dividends from muni bonds would carry no tax for federal, possibly no tax for state. Capital gains for stocks would be taxed only if/when you sell. If your stocks throw off dividends, taxes would be due each year - the rate would depend on if the dividends are qualified or not.

    3) Do what Brian suggested and then start contributing to Roth IRA each year.
But what does it matter? You are asking about $5.5k a year in a sea of over $3 million dollars. It seems to me that what you do with this $5.5 won't really matter much.

It seems that your posts are sort of nibbling around the edges. That's ok for awhile. You need time to learn how these things work. But eventually, the question you really need to approach and answer is what to do with the $3+ million. Once you figure that, smaller decisions like this will sort of make themselves.

If much of your money is still in cash, that is the real dragon to slay because your wealth won't keep up with inflation.
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Re: Nondeductible IRA

Postby retiredjg » Sun Mar 24, 2013 2:12 pm

doglover wrote:I have a profit sharing/401k plan fully funded every year with approx 900k. I also have a traditional IRA with approx 60k which has a basis of approx 30k from the past few years of nondeductible contributions.

I'd consider just converting this whole thing to Roth IRA. This will require that you pay tax on the $30k that has not yet been taxed. After that, just do the back door Roth IRA as suggested by Brian. This would be somewhat simpler than moving the untaxed money into your 401k plan.
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Re: Nondeductible IRA

Postby doglover » Sun Mar 24, 2013 3:29 pm

I really appreciate your suggestions, and I do agree with your other comments about the portfolio. I am in the process of converting gradually to a more boglehead type portfolio, with a bit extra in small cap value.

Your suggestions and time have not been wasted and I am trying to learn from you. Thanks!!!!
Last edited by doglover on Sun Mar 24, 2013 9:26 pm, edited 1 time in total.
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Re: Nondeductible IRA

Postby retiredjg » Sun Mar 24, 2013 3:46 pm

You do realize that people here will make portfolio suggestions if you want that. Right? See the link at the bottom of this message for how to ask that kind of question.
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